Finder is committed to editorial independence. While we receive compensation when you click links to partners, they do not influence our content.
What is a negative interest rate?
When interest rates go below zero, you lose money.
Normally, when you deposit your money into a bank account, the bank pays you interest on your deposit. Negative interest rates are the opposite — depositing money attracts a fee, but you get discounts when you borrow.
Why do negative interest rates exist?
Since the Global Financial Crisis (GFC) the world’s understanding of finance has changed rapidly. One idea that has emerged from the GFC is implementing negative interest rates. Negative interest rates are incentives for banks. The bank holds reserves and these are taxed by the negative interest rate, so the bank has higher incentives to lend out its reserves.
A few countries have said goodbye to zero interest rate policies (ZIRP) and hello to negative interest rate policies (NIRP). Switzerland was one of the first countries to implement NIRP in the 1970s in an attempt to deter a flood of foreign investment.
So how does this affect me?
Right now, it probably doesn’t. While commercial banks get to decide what interest rates to offer customers, those rates are usually based on the federal funds rate set by the Federal Reserve. While interest rates dropped to nearly zero in 2008, at the time of writing, the US has never used negative interest rates.
However, some economists think that it’s time to jump on board with the growing global trend. Pushing interest rates into negative territory could induce more spending and borrowing, stimulating the economy. Implementing a negative interest rate is an attempt to inject more liquidity — more cash — back into markets and ward off deflation.
America’s financial stability
The US banking system continues to benefit from strong overall asset performance. Rising home prices have forced more mortgage lending, which is particularly important to banking stability. Interest rates in the country have also risen as the economy has started to recover from the Global Financial Crisis. However, if they dip back down in the future, the Federal Reserve could decide to implement a negative interest rate. If they did, it would be up to your bank to decide whether or not charge its own negative interest rates.
A negative interest rate could be a way to stimulate the economy, but so far it isn’t something we’ve tried out in the US. Economists are divided over whether or not it would be a good idea — it would encourage spending and inject cash into the market, but it would also make it more difficult for people to save. That being said, even if the federal funds rate dips below zero in the future, there’s no guarantee that banks would pass that savings on to you.
Frequently asked questions
Picture: ShutterstockBack to top
More guides on Finder
Learn how this online crowdfunding investing platform lets you invest in small businesses throughout the country.
COVID sends parents scrambling for federal student aid — here are your options
It’s not too late to fill out the FAFSA for this year — but apply as soon as you can.
Stash vs. Acorns
We break down the best choice based on features, fees, complaints and other metrics.
Student loan rates have dropped — and now is the time to refinance
You could stand to save close to $23,000, according to a new study by Credible — if you can qualify.
Investing in the era of COVID-19
Finder speaks with investment experts from around the world about what investing looks like in a post-COVID-19 world.
Federal Reserve to keep rates near 0% through 2022 — what that means for you
Prime borrowers could see lower rates for years to come, but that’s not the case for everyone.
What you need to know before you defer your loan repayments during COVID-19
Deferring repayments can ease financial strain right now, but it will cost you in the long run.
What the coronavirus stimulus package means for you
This bill includes personal checks, expanded unemployment benefits, business financing and more.
What to do with your savings after a Fed rate cut
Here’s where to move your money when the Fed cuts rates
Fed slashes interest rates in second emergency cut
The unexpected move on Sunday night puts the Fed’s signature interest rate at 0%.
Ask an Expert